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MONDAY MORNING RISK MONITOR | EU, CHINA & JUNK BONDS

Takeaway: While the chatter is on Greece's 20% drop this morning, we remain focused on China and the US junk bond market.

Key Takeaway:

Our focus of late has been on China and the US high yield market. Last week saw both those areas put in small, counter-trend rallies. High yield backed off slightly last week, falling 5 bps to 6.94%. Meanwhile, China saw steel prices and soverign swaps both decline, albeit small. Our bearish view on both remains unchanged.

 

 

Current Ideas:

MONDAY MORNING RISK MONITOR | EU, CHINA & JUNK BONDS - RM19

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 4 of 12 improved / 3 out of 12 worsened / 5 of 12 unchanged

 • Intermediate-term(WoW): Positive / 7 of 12 improved / 4 out of 12 worsened / 1 of 12 unchanged

 • Long-term(WoW): Positive / 3 of 12 improved / 1 out of 12 worsened / 8 of 12 unchanged

 

MONDAY MORNING RISK MONITOR | EU, CHINA & JUNK BONDS - RM15 

 

1. U.S. Financial CDS -  Swaps tightened for 12 out of 27 domestic financial institutions. With the second quarter GDP reading coming in at 2.3%, within the range of economist estimates, and the Federal Reserve keeping interest rates near zero, swaps were unchanged at the median.

 

Tightened the most WoW: AXP, ACE, GS

Widened the most WoW: CB, MBI, GNW

Tightened the most WoW: ACE, ALL, AIG

Widened the most/ tightened the least MoM: MMC, MBI, SLM

 

MONDAY MORNING RISK MONITOR | EU, CHINA & JUNK BONDS - RM1

 

2. European Financial CDS - Swaps mostly widened in Europe last week as Eurozone inflation was shown to be a minimal 0.2% in July and Eurostat reported increased unemployment in the region on Friday. After not trading for a number of weeks, swaps for Russia's Sberbank traded at +70 bps higher than their last mark given the Bank of Russia's cutting interest rates for the fifth time this year and citing economic risks.

 

MONDAY MORNING RISK MONITOR | EU, CHINA & JUNK BONDS - RM2

 

3. Asian Financial CDS - Chinese banks saw their swaps widen by +2 bps to +7 bps on the week. Meanwhile, the Japanese and Indian banking complexes were generally flat to tighter. 

 

MONDAY MORNING RISK MONITOR | EU, CHINA & JUNK BONDS - RM17

 

4. Sovereign CDS – Sovereign swaps mostly widened over last week. Spanish sovereign swaps widened the most, +6 bps to 95, followed by Italy, which widened +5 bps to 116.

 

MONDAY MORNING RISK MONITOR | EU, CHINA & JUNK BONDS - RM18

 

MONDAY MORNING RISK MONITOR | EU, CHINA & JUNK BONDS - RM3

 

MONDAY MORNING RISK MONITOR | EU, CHINA & JUNK BONDS - RM4

 

5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week. Turkish sovereign swaps widened by +11 bps to 236 while on the opposite end of the spectrum Mexican swaps tightened by -4 bps to 136.

 

MONDAY MORNING RISK MONITOR | EU, CHINA & JUNK BONDS - RM16

 

MONDAY MORNING RISK MONITOR | EU, CHINA & JUNK BONDS - RM20

 

6. High Yield (YTM) Monitor – High Yield rates fell 5 bps last week, ending the week at 6.94% versus 6.99% the prior week.

 

MONDAY MORNING RISK MONITOR | EU, CHINA & JUNK BONDS - RM5

 

7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 2.0 points last week, ending at 1882.

 

MONDAY MORNING RISK MONITOR | EU, CHINA & JUNK BONDS - RM6

 

8. TED Spread Monitor – The TED spread fell 2 basis points last week, ending the week at 24 bps this week versus last week’s print of 26 bps.

 

MONDAY MORNING RISK MONITOR | EU, CHINA & JUNK BONDS - RM7

 

9. CRB Commodity Price Index – The CRB index fell -3.2%, ending the week at 203 versus 209 the prior week. As compared with the prior month, commodity prices have decreased -9.8%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR | EU, CHINA & JUNK BONDS - RM8

 

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps to 10 bps.

 

MONDAY MORNING RISK MONITOR | EU, CHINA & JUNK BONDS - RM9

 

11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 13 basis points last week, ending the week at 1.47% versus last week’s print of 1.34%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR | EU, CHINA & JUNK BONDS - RM10

 

12. Chinese Steel – Steel prices in China rose 4.9% last week, or 104 yuan/ton, to 2239 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR | EU, CHINA & JUNK BONDS - RM12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 152 bps, -6 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR | EU, CHINA & JUNK BONDS - RM13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.6% upside to TRADE resistance and -1.8% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR | EU, CHINA & JUNK BONDS - RM14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

7/30/15 GIS TO BUY WWAV | IN SEARCH FOR TRANSFORMATIONAL GROWTH

7/27/15 HAIN | ORGANIC DECEPTION PART TWO

7/24/15 HAIN | COSMETIC DECEPTION

7/23/15 CPB | Analyst Day Notes

7/21/15 GIS | Green Giant Divestiture is the Worst Kept Secret

 

RECENT NEWS FLOW

Saturday, August 1

K | Announced the completion of new master contract agreement with BCTGM, the primary workforce for cereal manufacturing (click here for article)

 

Thursday, July 30

MDLZ | Downgraded to neutral from buy at Goldman Sachs, however target price increased to $46 from $43

CAG | Eliminating BPA from canned packaging (click here for article)

 

Wednesday, July 29

BN-FR / SBUX | Partner up to create a Greek yogurt brand for sale at retail (click here for article)

WFM | Caught a few downgrades as a result of poor performance stemming from the pricing scandal (3Q15 earnings release here)

MDLZ | Investing more than $130mm to modernize North American supply chain (click here for article)

 

Tuesday, July 28

CAG | Rumored to be in talks with TreeHouse and Post regarding private label auction (click here for article)

PG | Appointed David Taylor, a company veteran to President and CEO (click here for article)

LWAY | Probiotics gaining adoption (click here for article)

 

Monday, July 27

UNFI | Downgraded to market perform from outperform at BMO Capital, target cut to $52 from $71

GOOG | Google recently attempted to acquire Impossible Foods, a plant-based cheeseburger company (click here for article)

 

SECTOR PERFORMANCE

Food and organic stocks that we follow outperformed the XLP last week. The XLP was up 1.3%, the top performer from our list was BDBD posting an increase of 20.5%, although BDBD is still down -43.2% in the last 52 weeks. This sharp increase was due to an activist disclosing his stake in the company.

Monday Mashup - CHART 2

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLP remains bullish on a TRADE and TREND duration.

Monday Mashup - CHART 3

 

Food and Organic Companies

Monday Mashup - CHART 4

Monday Mashup - CHART 5

 


CSLT | GOING LONG INTO EARNINGS

Takeaway: We are elevating Castlight Health (CSLT) from our long bench to our Investment Ideas List as a Long ahead of earnings on 8/5.

CSLT | GOING LONG INTO EARNINGS - 2015 07 31 Position Monitor

overview

We are elevating Castlight Health (CSLT) from our long bench to our Investment Ideas List as a Long ahead of earnings on 8/5.  We are not expecting any surprises going into the quarter, with consensus sales estimate of $17.8 mill in-line with our model.  However, at 4.9x NTM EV/Sales, the stock trades at a steep discount to its growth rate relative to peers, implying only 18% sales growth for 2016.  This compares to the 68% sales growth the company is on track for in 2015, and significantly below our 2016 estimate for +50% growth.  Further, we expect the data sharing agreement with UNH to set the stage for strong bookings growth into the seasonally strong back half of the year. CSLT fits well within our theme of Healthcare Deflation and we can see +40% upside based on our growth estimates over next 12-months. 

 

background

CSLT provides participants in self-insured health plans the ability to shop for healthcare using Castlight's cloud-based suite of products.  The company is at the interchange between the employer, employee and managed care organization, aggregating data and providing analytics to help support the Enterprise.  Their offering is built on price transparency and cost savings, which fits well into our Healthcare Deflation Theme.  

 

CSLT | GOING LONG INTO EARNINGS - 2015 08 02 CSLT CDHP 

 

55% of covered workers in the United States are part of an employer self-insured health plan. In attempt to control rising costs, employers have shifted more of the premium expense onto the employee whether through Consumer Direct Health Plans (CDHP) or outright increase in annual contributions. Castlight is well positioned to capitalize on this trend as employers look for tools to reduce health costs and employees facing greater out-of-pocket expense begin to frame consumption decisions around value.

 

Castlight's value proposition comes in three major forms:

  • Cost Savings to the Employee - Increase in high deductible plans and excessive premium growth continues to put pressure on consumers of healthcare.  Castlight provides a platform for price transparency and quality information, which allows employees to frame medical consumption decisions around value.
  • Cost Savings to the Employer - For self-insured employer health plans, cost savings to the consumer is cost savings to the employer.  Castlight also provides educational tools to help avoid unnecessary visits to high cost care settings such as the E.R. 
  • Employer Control/Access to Information - Castlight provides employers with a dashboard and control system to monitor healthcare spending, identify areas of cost savings and implement employee benefit plans. 

 

show me the data

Castlight relies on access to claims data from managed care companies for their pricing information.  With every new data sharing agreement, the company has to build out the infrastructure to get access to this information.  The last major hurdle the company faced was getting access to UNH's network, which they did earlier in 2015.  Prior to that, the company was unable to target the customers of the largest managed care organization in the United States.  We believe this will provide a nice tailwind to new bookings growth as we enter the seasonally strong back half of the year. 

 

valuation

Castlight went public in March 2014 at an offering price of $16/share.  The stock jumped +150% out of the gate, and at a price in the low $40s, was trading over 100x NTM EV/Sales.  Since then, we have watched shares come down to earth and stabilize in the $7-9 range or 5-7x NTM EV/Sales.  Short interest is currently 30%, and has been relatively stable over the last year (~9-10 mill shares sold short) when compared against fully adjusted available float (~30 mill shares). 

 

CSLT | GOING LONG INTO EARNINGS - 2015 07 31 CSLT PRICE SHORT INTEREST

 

Unlike many recent IPOs, Castlight is an early stage growth company working off small revenue base of $75 mill (2015 estimate).  This provides a rare opportunity to get in on the ground floor of what is likely to be a multi-year growth story.  We expect the company to grow sales by +50% in 2016, on top of the +68% revenue growth in 2015.  

 

CSLT | GOING LONG INTO EARNINGS - 2015 07 31 CSLT EV Sales

 

At 4.9x NTM EV/Sales, the company trades at a -46% discount to its sales growth rate relative peers. While it can be argued that the discount is deserved given the company's immature and unprofitable status, we believe it also represents an attractive margin of safety.

 

CSLT | GOING LONG INTO EARNINGS - 2015 07 31 CSLT Peer Valuation

 

conclusion

Castlight Health fits well within our theme of Healthcare Deflation and we can see +40% upside based on our growth estimates over the next 12-months.  At the same time, we recognize the risks embedded in the position given its small size ($658 mill market cap), short history as a public company (~1.5 years) and high short interest (+30%).  We would also disclose that we don't have the same type of visibility as we do with our other top long ideas (HOLX, ATHN, MDSO), but we will be expanding our knowledge base as we continue to focus more intently on the name.  However, we believe the risk/reward is in our favor given the valuation discount and data sharing agreement with UNH that sets the stage for strong bookings growth in the back half of 2015.

 

-------

 

CSLT | GOING LONG INTO EARNINGS - 2015 08 02 CSLT Insurance Major Expenses

CSLT | GOING LONG INTO EARNINGS - 2015 08 03 CSLT Self Funded

CSLT | GOING LONG INTO EARNINGS - 2015 08 02 CSLT Deductibles

CSLT | GOING LONG INTO EARNINGS - 2015 07 31 Premium Growth Excessive

 

Please call or e-mail with any questions.

 

Thomas Tobin
Managing Director 

@HedgeyeHC

 

Andrew Freedman

Analyst

@HedgeyeHIT 

 


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Deflation's Arena

“The credit belongs to the man who is actually in the arena…”
-Teddy Roosevelt

 

After all, it is we, the men and women of the Global Macro gridiron, “who strive valiantly; who errs, and comes short again and again, because there is no effort without error or shortcoming”…

 

We might not get everything right. But we tend to not implode on the big risks when consensus does.. and, at a bare minimum, our place on Wall Street “will never be with those cold and timid souls who know neither victory nor defeat.”

 

Deflation's Arena - 08.03.15 chart large

 

Back to the Global Macro Grind

 

Yep. That’ll fire me up on any Monday morning – never mind one in the arena of August heat. Your summer has been a relatively victorious one if you stayed clear of what many hoped was a “reflation” TRADE morphing into a legitimate TREND.

 

Here’s last week’s Currency/Commodity score, with a 3-month overlay to contextualize it:

 

  1. US Dollar Index flat week-over-week and +2.7% in the last 3 months
  2. Euro (vs. USD) flat week-over-week and -2.1% in the last 3 months
  3. Japanese Yen -0.1% week-over-week and -3.6% in the last 3 months
  4. Canadian Dollar -0.3% week-over-week and -7.7% in the last 3 months
  5. Russian Ruble -5.3% week-over-week and -16.3% in the last 3 months
  6. CRB Commodities Index -1.2% last week and -11.7% in the last 3 months
  7. Oil (WTI) -2.6% last week and -24.1% in the last 3 months
  8. Gold +0.8% last week and -7.6% in the last 3 months
  9. Copper -1.2% last week and -18.5% in the last 3 months
  10. 5yr UST Break-evens -3bps wk-over-wk to 1.40% (-38 bps in the last 3 months)

 

I know. Break-evens aren’t currencies or commodities, but since I like to play dirty sometimes I thought I’d slip that in there (mainly because that macro read-through on inflation expectations is highly instructed by FX and Commodity deflations).

 

The read-through to Global Equity markets was dominated by rising #Deflation expectations too:

 

  1. US Energy Sector (XLE) was the only one to close down wk-over-wk and is -16.1% in the last 3 months
  2. Emerging Markets (MSCI) and EM LATAM (MSCI) deflated another -1.8% and -0.7%, respectively
  3. Russian Stocks (RTSI) carried XLE-like negative alpha wk-over-wk (again) and are -16.6% in the last 3 months

 

Fortunately, I think the Fed gets this. That’s why the #1 change in their language last week was their concern on losing their almighty illusion of growth (inflated asset prices). That’s mainly why the doves took home the Low-Beta cake staying with the Long Bond too.

 

For those of you who took advantage of the correction in both Long-term Treasuries (TLT) and US Equities that look like bonds, well done. Oh my face was “marred by dust and sweat” (no blood) on that front. And I’m damn proud we stuck with the #process too.

 

Utilities (XLU) ripped higher into Friday’s month-end markup, taking their July absolute and relative gain vs. Energy (XLE) to:

 

  1. Utilities (XLU) +6.10%
  2. Energy (XLE) -7.69%

 

So, in terms of what happens next, this week’s US jobs report (Friday) should matter to what’s been working for the last week and month. Consensus is still looking for another > 225,000 (only because estimates anchor on what happened last time).

 

While the rate of change in Non-Farm Payroll gains has been slowing since FEB, pro-cyclical economists haven’t had to react to jobs prints that have looked as nasty as Texan deflation has. Alas, this is a cycle – give it time…

 

Away from capitalizing on #Deflation what else continued to work both last week and in July? From a Macro Style Factor perspective:

 

  1. BETA: Low-Beta was up another +1.9% last week (vs. the Dow +0.7% and SP500 +1.2%) and was +3.2% for July
  2. SIZE: Large-Cap was up another +1.5% last week and was +1.9% for July
  3. SHORT INTEREST: Low-Short-Interest was +1.3% wk-over-wk and +2.0% for July

 

In other words, if you were long something boring with non-cyclical cash flow, low-short-interest (2%), and a big market cap ($35B) like General Mills (GIS), you were up +1.9% on that in July. That’s not flashy, but it helped us achieve the goal – victory in the arena.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.18-2.28%

SPX 2067-2130
VIX 11.89-14.31
USD 96.58-97.96
EUR/USD 1.08-1.10
Oil (WTI) 46.05-48.69

 

Best of luck out there today,

KM

 

Deflation's Arena - 08.03.15 chart1 image normal


August 3, 2015

August 3, 2015 - Slide1

 

BULLISH TRENDS

August 3, 2015 - Slide2

August 3, 2015 - Slide3

August 3, 2015 - Slide4

BEARISH TRENDS

August 3, 2015 - Slide5

August 3, 2015 - Slide6 

August 3, 2015 - Slide7

August 3, 2015 - Slide8

August 3, 2015 - Slide9

August 3, 2015 - Slide10

August 3, 2015 - Slide11
August 3, 2015 - Slide12


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